Nudge, nudge…

As the recent award of the Nobel Memorial Prize in Economics to Professor Richard Thaler demonstrates, ideas that seem absurdly simple can cause a significant change in behaviour and, thus, outcomes.

For someone of whom his thesis adviser said: “We didn’t expect much of him”, Professor Thaler has had quite an impact by incorporating better understanding of how human beings (rather than the idealized homo economicus beloved by most of his peers) actually make decisions, and applying that to improving public policy. As he himself said after the award was announced” “In order to do good economics, you have to keep in mind that people are human”. How shocking!

All of this matters because, rather than just showing that people are irrational (obvious, but not exactly helpful), he was able to demonstrate that they tend to be irrational in consistent ways, so that reality can be modelled and channeled. Perhaps the most famous, and potentially far-reaching example is in the design of enrolment systems, such as for pension schemes, changing them from “opt-in” to “opt-out”, and thus significantly increasing the level of involvement.

Of course, the world being what it is, such actions are dubbed “libertarian paternalism”, with the emphasis on “paternalism”, which must be a bad thing because it deprives us of our “free will” and the right to make a mess of our lives and futures. And the world also being what is, such an approach can and is used to manipulate people into continuing to pay for services that they do not want- the “Free 30-day trial, auto-renewal” approach. As always, the use to which an idea or technique is put can often be ethical or unethical.

Professor Thaler also demonstrated that we humans are prone to the endowment effect. We are reluctant to part with something we already have unless we receive more for it than we would have to expend to acquire the same item if we did not already possess it. What we have is considered more valuable.

Perhaps less well known is Professor Thaler’s suggestion that (following the work of psychologist Gary Klein, and Thaler’s fellow Nobel Laureate, Daniel Kahneman) “premortems” (yes, you read that correctly) be used more widely in the context of particularly important decisions as a means to counteract the dangers of “groupthink” and overconfidence. In essence, people are required actively to contemplate the consequences of failure before it can happen. Such an approach is not intended to lead to decision-making paralysis, but may help avoid overreach and the fact that, by the time of the postmortem, it is a little too late! At Awbury, we are always trying to ensure that we avoid the dangers that stem from the “usual approaches” to decision-making, because we would rather not be the subject of a postmortem!

And one finding of Professor Thaler which is particularly dear to the Awbury Team is that people place a high value on fairness. They will penalize behaviour that they consider unfair, even if doing so is to their own detriment. As we have written before, a fundamental tenet of Awbury’s business model is that interests must be properly aligned and the economic outcomes and benefits of any transaction or structure be allocated fairly to create an actual “win-win” outcome. This is not always easy, but it is not altruism (we are a business after all!), but simple common sense. No-one likes to think that they have been “ripped-off” or taken advantage of, and it is detrimental to building a sustainable franchise.

So, how can we help you?

The Awbury Team

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